Glossary of Terms for Buying a Home
The following glossary consists of terminology frequently used in the purchase of a home in residential real estate.
Appraisal - is a valuation of a property by a third-party licensed appraiser. The lender often chooses the appraiser. The appraisal is done in conjunction with the loan and is paid by the buyer at closing. If a property does not appraise for the full Sales Price in the contract, then the buyer must come up with the difference in cash, the seller must reduce the Sales Price, or a combination thereof. Otherwise, the lender will not process the loan if the difference cannot be accounted for. This is one reason it is important to analyze comparable sales in advance of making an offer, basically to make sure the comparable sales fully support the Sale Price.
Closing Date - the date a real estate transaction or sale closes. It is typically falls on a business day.
Closing or Settlement Statement - the document used by the title companies at closing that itemizes all fees for every party involved in the transaction, which includes credits and debits for both the buyer and seller. This includes any prorations for property taxes as well as HOA dues, if applicable. It will specify how much a buyer needs to bring to the closing and the amount of proceeds the seller receives.
Contract - refers to a written agreement for the sale of a property between a buyer and seller that is signed, has an effective date filled in by a broker upon final acceptance and is thus executed.
Earnest Money* - this fee is paid by the buyer and is held in escrow by the title company until the sale closes at which point it is credited to the sales price. It is usually a negotiated fee (for example, it may be $5,000 for a $500,000 property). This fee is due to the title company within three days of the executed contract date. This fee shows the buyer is earnest about buying the property, hence the name. The Earnest Money is refundable to the buyer in the event the contract is terminated as long as the buyer does so according to the terms of the contract (during the Option Period and/or if their financing falls through; please note that some other situations apply).
Executed Date / Effective Date - the effective date is the executed date on the contract or amendment, which is filled in by the last realtor that has had any initialing or signing to be done. The broker or agent involved will fill in this date after all parties have signed the contract. This date is used for the option period and all other contingencies.
Inspection* - is a process whereby a licensed inspector closely inspects a property, testing the HVAC system, examining the roof, etc. and then reports his findings back to the buyer in a written report usually emailed within 24 hours of the inspection. This is done for a fee that costs the buyer roughly $375 - $550, which is due at the time of the inspection.
Lead-Based Paint Addendum - is used for properties built before 1978.
Offer - an offer for the purchase of a property is typically presented in writing by a buyer through their realtor, to the seller or owner of the property listed for sale. It is just that - an offer, something for consideration, an attempt to purchase. Nothing is binding with an offer. A response to an offer that includes changing at least one term in that offer is termed a counteroffer. Only once an offer is accepted by both parties, signed and executed will it become a contract.
Option Fee* - this fee customarily ranges $100 - $250 and gives the buyer the option or the unrestricted right to terminate the contract, for whatever reason, during the Option Period. This fee is paid directly to the seller, is due within three days of the effective contract date, is non-refundable and often applies to the Sales Price.
Option Period - a period of time specified in the contract starting from the effective contract date and runs for a period of days (often 10 - 14 days) during which the buyer has the unrestricted right to terminate the contract.
Pre-qualification or Pre-approval Letter - is a letter from a lender stating you are pre-qualified or pre-approved for a loan amount. Pre-qualification is often seen as the first step in the mortgage process, while pre-approval is the next step. A pre-qualification letter or a pre-approval letter can help demonstrate that you have a good chance of being approved for a mortgage for the amount that you have offered on a property.
Residential Service Contract or Home Warranty - is a one-year service agreement that covers the repair or replacement of many major home system components and appliances that typically breakdown over time due to normal wear and tear. The contract allows the seller to pay an amount towards the Residential Service Contract on behalf of the buyer if this is agreed upon by the two parties in the contract. For example, the seller may agree in the sales contract to pay up to $500 of the Residential Service Contract for the buyer. If the buyer chooses a more expensive Residential Service Contract, the buyer then pays the difference. If the buyer chooses a more affordable contract, then the seller simply pays a lesser amount for the Residential Service Contract.
Seller’s Disclosure - is a questionnaire filled out by the seller and provided to the buyer whereby the seller discloses the property condition to the best of their knowledge. It is provided to the buyer before an offer is made or within a few days of the effective contract date as stipulated in the contract.
Survey - is a description of a property that details the features of a lot and includes the placement of any buildings on the lot, fences, property lines, pools, etc. and specifically identifies easements and encroachments that may affect the title on a property. The Seller provides this to the Buyer. If the Survey is not deemed acceptable by either the lender or the title company, a new one will be required. Surveys are not provided by the seller in the sale of condominiums.
Third-Party Financing - refers to financing from a lender for a loan.
Title Commitment - is basically the title company's promise to issue a title insurance policy for the property after closing. The title commitment contains the same terms, conditions and exclusions that will be in the actual insurance policy. It is usually provided by the title company within 20 days of their receipt of the executed contract.
Title Company - guarantees the title through title insurance. Closings usually take place at title companies, which are run by title lawyers. The title company will work with you, the realtors and any lender to coordinate the transaction from contract to close.
Title Insurance - guarantees the title is free and clear and is an expense usually paid by the seller.
* Represents out-of-pocket expenses for the buyer before the closing.
** All figures, dollar amounts and suggested periods of time / dates listed herein are merely approximations.